<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
-
ACT OF 1934
For the quarterly period ended January 31, 1999
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 0-23007
AMERICAN TELESOURCE INTERNATIONAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2849995
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12500 NETWORK BLVD., SUITE 407
SAN ANTONIO, TEXAS 78249
(210) 558-6090
(ADDRESS, INCLUDING ZIP CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES
AND TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
The number of shares outstanding of the registrant's common stock at March
11, 1999 was 46,805,599.
- --------------------------------------------------------------------------------
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JANUARY 31, 1999
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION
Page
----
<S> <C>
Item 1. Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of July 31, 1998 and January 31, 1999............................................ 3
Consolidated Statements of Operations for the Three and Six Months Ended January 31, 1998 and 1999.............. 4
Consolidated Statements of Cash Flows for the Six Months Ended January 31, 1998 and 1999........................ 5
Notes to Consolidated Financial Statements ..................................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .......................... 8
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................................................................ 14
</TABLE>
2
<PAGE>
American TeleSource International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share information)
<TABLE>
<CAPTION>
July 31, January 31,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,091 $ 240
Accounts receivable, net of allowance of $ 209 and $315, respectively 3,748 3,667
Prepaid expenses and other assets 844 895
--------- ---------
Total current assets 5,683 4,802
--------- ---------
PROPERTY AND EQUIPMENT (At cost): 14,233 16,203
Less - Accumulated depreciation and amortization (2,418) (3,208)
--------- ---------
Net property and equipment 11,815 12,995
--------- ---------
OTHER ASSETS, net:
Goodwill, net 5,091 5,103
Contracts, net 1,173 908
Trademark, net - 930
Other assets 489 317
--------- ---------
Total assets $ 24,251 $ 25,055
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 5,683 $ 4,310
Accrued liabilities 2,113 3,775
Current portion of notes payable 688 1,337
Current portion of obligations under capital leases 2,351 2,475
Deferred revenue 535 455
--------- ---------
Total current liabilities 11,370 12,352
--------- ---------
LONG-TERM LIABILITIES:
Notes payable, less current portion 719 2,185
Convertible long-term debt, less current portion 1,604 1,769
Obligations under capital leases, less current portion 2,941 1,995
Other long-term liabilities 530 535
--------- ---------
Total long-term liabilities 5,794 6,484
--------- ---------
COMMITMENTS AND CONTINGENCIES:
STOCKHOLDERS' EQUITY:
Preferred shares, no par value, unlimited shares authorized,
no shares issued and outstanding at July 31, 1998 and January 31, 1999
Common stock, $0.001 par value, 100,000,000 shares authorized,
45,603,566 issued and outstanding at July 31, 1998,
46,501,169 issued and outstanding at January 31, 1999 46 47
Additional paid in capital 22,248 23,165
Accumulated deficit (14,396) (16,127)
Deferred compensation (667) (779)
Cumulative translation adjustment (144) (87)
--------- ---------
Total stockholders' equity 7,087 6,219
--------- ---------
Total liabilities and stockholders' equity $ 24,251 $ 25,055
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
American TeleSource International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended January 31, Six months ended January 31,
------------------------------ ----------------------------
1998 1999 1998 1999
------------- ------------ ----------- ----------
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Call services $ 3,644 $ 1,719 $ 6,506 $ 3,272
Direct dial services 1,570 1,486 3,141 2,826
Network management services 3,174 4,299 4,527 11,087
Internet E-commerce 316 621 561 1,176
-------- ------- ------- -------
Total operating revenues 8,704 8,125 14,735 18,361
-------- ------- ------- -------
OPERATING EXPENSES:
Cost of services 5,027 4,824 8,903 11,325
Selling, general and administrative 3,293 3,240 6,085 6,573
Depreciation and amortization 541 758 880 1,407
-------- ------- ------- -------
Total operating expenses 8,861 8,822 15,868 19,305
-------- ------- ------- -------
Operating loss (157) (697) (1,133) (944)
OTHER INCOME(EXPENSE)
Interest income 13 17 29 30
Other income (expense) (7) 8 20 26
Interest expense (364) (365) (729) (780)
-------- ------- ------- -------
Total other income (expense) (358) (340) (680) (724)
-------- ------- ------- -------
Loss before income tax expense (515) (1,037) (1,813) (1,668)
Foreign income tax expense - (52) - (63)
Net loss ($515) ($1,089) ($1,813) ($1,731)
======== ======= ======= =======
Net loss per share ($0.01) ($0.02) ($0.05) ($0.04)
======== ======= ======= =======
Weighted average common shares
outstanding 38,446 46,324 37,757 45,976
======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
American TeleSource International, Inc. and Subsidiaries
Consolidated Statement of Cash Flows
(In thousands)
(unaudited)
<TABLE>
<CAPTION>
Six months ended January 31,
----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ($1,813) ($1,731)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 880 1,407
Amortization of debt discount 150 165
Deferred compensation 249 232
Cumulative translation adjustment 21 57
Provision for losses on accounts receivable 464 387
Changes in operating assets and liabilities-
Increase in accounts receivable (1,392) (306)
Increase in other assets - current and long-term (418) (125)
Increase (decrease) in accounts payable 2,105 (1,372)
Increase in accrued liabilities 632 1,566
Increase in deferred revenue (204) (80)
-------- --------
Net cash provided by operating activities 674 200
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (3,560) (641)
Net cash paid in acquisitions (1,724) (171)
-------- --------
Net cash used in investing activities (5,284) (812)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of debt 1,950 180
Net increase (decrease) in short-term borrowings 199 (112)
Payments on debt (14) (183)
Capital lease payments (657) (682)
Payments on long-term liabilities (46) -
Proceeds from issuance of common stock,
net of issuance costs 2,612 558
-------- --------
Net cash provided by (used in) financing activities 4,044 (239)
-------- --------
Net decrease in cash (566) (851)
Cash, beginning of period 1,921 1,091
-------- --------
Cash, end of period $ 1,355 $ 240
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC.
AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except per share amounts)
1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements, which include
the accounts of ATSI-Delaware, ATSI-Canada, ATSI-Texas, ATSI-Mexico, Computel,
Telespan, Sinfra and GlobalSCAPE have been prepared in accordance with Rule 10-
01 of Regulation S-X, "Interim Financial Statements," and accordingly do not
include all information and footnotes required under generally accepted
accounting principles for complete financial statements. In the opinion of
management, these interim financial statements contain all adjustments, without
audit, necessary to present fairly the consolidated financial position of ATSI
and its subsidiaries ("ATSI" or "the Company") as of July 31, 1998 and January
31, 1999, the results of their operations for the three and six months ended
January 31, 1998 and 1999 and cash flows for the six months ended January 31,
1998 and 1999. All adjustments are of a normal recurring nature. All
significant intercompany balances and transactions have been eliminated in
consolidation. It is recommended that these interim consolidated financial
statements be read in conjunction with the consolidated financial statements and
the notes thereto for the year ended July 31, 1998 included in the Company's
annual report on Form 10-K filed with the SEC on October 29, 1998. Certain
prior period amounts have been reclassified for comparative purposes. The
results of operations for any interim period are not necessarily indicative of
the results to be expected for the full year.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements. This
statement is effective for fiscal years beginning after December 15, 1997.
Because the Company's component of comprehensive income, foreign currency
translation adjustment, is immaterial to the financial condition or results of
operations for the three and six months ended January 31, 1999 and 1998, the
amounts are not reported or displayed in a separate financial statement.
In fiscal 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, "Earnings Per Share", which establishes standards for
computing and presenting earning per share ("EPS") with entities with publicly
held common stock or potential common stock. SFAS No. 128 simplifies the
standards for computing EPS previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share", and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with a presentation
of basic EPS, which excludes dilution. It also requires dual presentation of
basic and diluted EPS on the face of the income statement for all entities with
a complex capital structure. As the Company had a net loss for the three and
six months ended January 31, 1998 and 1999, diluted EPS equals basic EPS, as
potentially dilutive common stock equivalents are antidilutive in loss periods.
Prior period EPS data has been restated as required by SFAS No. 128.
2. FUTURE OPERATIONS
The consolidated financial statements of the Company have been prepared on
the basis of accounting principles applicable to a going concern. For the
period from December 17, 1993 to January 31, 1999, the Company has incurred
cumulative net losses of approximately $16,073. Further, the Company has a
working capital deficit of approximately $7,550 at January 31, 1999. Although
the Company has capital resources available to it, these resources are limited
and may not be available to support its ongoing operations until such time as
the Company is able to maintain positive cash flow from operations. There is no
assurance the Company will be able to achieve future revenue levels sufficient
to support operations or recover its investment in property and equipment,
goodwill and other intangible assets. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent upon the ongoing support of
its stockholders and customers, its ability to obtain capital resources to
support operations and its ability to successfully market its services.
The Company is likely to require additional financial resources in the near
term and could require additional financial resources in the long-term to
support its ongoing operations. The Company has retained various financial
advisers
6
<PAGE>
to assist it in refining its strategic growth plan, defining its capital needs
and obtaining the funds required to meet those needs. The plan includes securing
funds through equity offerings and entering into lease or long-term debt
financing agreements to raise capital. There can be no assurances, however, that
such equity offerings or other long-term debt financing arrangements will
actually be consummated or that such funds, if received, will be sufficient to
support existing operations until revenue levels are achieved sufficient to
maintain positive cash flow from operations. If the Company is not successful in
completing additional equity offerings or entering into other financial
arrangements, or if the funds raised in such stock offerings or other financial
arrangements are not adequate to support the Company until a successful level of
operations is attained, the Company has limited additional sources of debt or
equity capital and would likely be unable to continue operating as a going
concern.
3. ACQUISITION
In January 1999, the Company acquired the rights to a computer software
program known as "CuteFTP". Prior to January 1999, the Company had been the
distributor of this software under an Exclusive Distribution Agreement executed
in June 1996 with the software's creator. The Company acquired the rights to
CuteFTP in exchange for cash payments totaling approximately $190 in January and
February 1999 and a note payable in the amount of $756 to be paid in twelve
monthly installments.
4. PROPERTY, PLANT AND EQUIPMENT
In December 1998, the Company signed an agreement with Network Equipment
Technologies, Inc. (N.E.T.) for the purchase, financing and installation of an
ATM (asynchronous transfer mode) "next generation" network between the U.S. and
Mexico. This equipment is being purchased through a capital lease transaction
covering thirty-six months and carrying an interest rate of 9.5%. Monthly
payments of principal and interest total approximately $26,000. As of January
31, 1999, the network was not fully operational and the Company has not yet made
its first monthly payment.
Additionally, in December 1998, the Company signed an agreement with
Northern Telecom "Nortel" for the purchase and installation of a Nortel DMS
250/300 International Gateway switch. In February 1999, the Company accepted a
proposal from a company, subject to due diligence, to finance approximately $2
million in equipment through a note to be paid in twenty (20) quarterly payments
beginning approximately six months following the closing date of this
transaction. Interest accrues monthly at a fixed rate equal to the five year
bank swap rate as reported on Telerate, plus 4.95%. The Company has recorded
the purchase of the Nortel switch as both an increase in property and equipment
and notes payable, and has accounted for the purchase as a non-cash transaction.
5. STOCK OPTIONS
On September 9, 1998, the Company's Board of Directors adopted the 1998
Stock Option Plan. Under the 1998 Stock Option Plan, options to purchase up to
two million incentive stock options and non-qualified stock options may be
granted to employees, directors and certain other persons. The Board
concurrently granted options to purchase 1,499,000 shares of Common Stock at an
exercise price of $0.55 per share subject to stockholder approval of the 1998
Stock Option Plan. The options vest pursuant to the individual stock option
agreements, usually 33 percent per year beginning one year from the date of
grant. The exercise price of these options is equal to the market price of the
shares of the common stock as of the date of grant. On December 16, 1998, the
Board approved the granting of an additional 289,800 in stock options at an
exercise price of $0.78 per share. On December 17, 1998, the Company's
stockholders overwhelmingly approved the 1998 Stock Option Plan. In accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"),
the Company recorded approximately $400 in deferred compensation expense related
to approximately 1.5 million of the options granted based on the increase in the
Company's stock price from September 9, 1998 to December 17, 1998, when the
underlying 1998 Stock Option Plan was approved by the Company's shareholders.
7
<PAGE>
6. YEAR 2000 COMPLIANCE
The Company has initiated a program to identify and address issues
associated with the ability of its date-sensitive information, telephony and
business systems to properly recognize the year 2000 in order to avoid
interruption of the operation of these systems at the turn of the century. This
program is being conducted by the Company's Engineering/Management Information
Systems group, which is coordinating the efforts of internal resources as well
as third party vendors in making all necessary changes to the Company's systems.
The Company plans to have completed all necessary testing and deployment by mid-
1999. Some of these changes are being made as a part of larger system upgrades.
The Company expects to avoid disruption of its information, telephony and
business systems as a result of these efforts.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q contains certain "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended (the "Securities Act"), and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). Specifically, all statements other
than statements of historical facts included in the report regarding the
Company's financial position, business strategy and plans and objectives of
management of the Company for future operations are forward-looking statements.
These forward-looking statements are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used in this report, the words "anticipate,"
"believe," "could," "estimate," "expect" and "intend" and words or phrases of
similar import, as they relate to the Company or Company's management, are
intended to identify forward-looking statements. Such statements reflect the
current view of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions related to certain factors
including, without limitation, the inability to obtain capital, changes in the
Mexican political or economic environment, the adoption by Mexico of new laws or
regulations, or changes effected by Mexico to existing laws affecting the
communications industry generally or the Company specifically, increased or
redirected competition efforts, targeting the Company's services or operation,
by competitors, general economic conditions, customer relations, relationships
with vendors, the interest rate environment, seasonality, the operation of the
Company's network, the ability of the Company's direct sales force to
successfully replace its independent marketing representatives or the failure of
its direct sales force to produce anticipated results, transmission costs,
product introductions and acceptance, the inability to continue to generate new
sources of revenue, technological change, changes in industry practices, one-
time events and other factors described herein ("cautionary statements").
Reference is made to the risks and uncertainties described in the Company's
annual report on Form 10-K. Although the Company believes that the
expectations are reasonable, it can give no assurance that such expectations
will prove to be correct. Based upon changing conditions, should any one or
more of these risks or uncertainties materialize, or should any underlying
assumptions prove incorrect, actual results may vary materially from those
described herein as anticipated, believed, estimated, expected or intended. All
subsequent written and oral forward-looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by the applicable cautionary statements.
GENERAL
The Company is principally engaged in providing retail and wholesale
communications services within and between the United States and select markets
within Latin America. In December of 1993, utilizing a bilingual and bicultural
team, the Company began assembling a framework of licenses, interconnection and
service agreements, network facilities, and distribution channels (collectively
referred to hereinafter as "framework") in Mexico and the United States. The
Company feels that this framework will allow it to provide domestic and
international communications services with U.S. standards of reliability to the
Mexican market which has historically been underserved by the national telephone
monopoly, Telefonos de Mexico ("Telmex"). The Company also plans to establish a
framework in other Latin American countries as the regulatory environments in
those countries allow. In addition to the United States and Mexico, the Company
currently has rights to use facilities and has strategic relationships with
domestic carriers in Costa Rica, El Salvador and Guatemala.
Utilizing the framework described above, the Company provides local,
domestic long distance and international calls from its own public telephones
and casetas within Mexico, and provides similar services to the third party-
owned casetas, public telephones and hotels in Mexico as well. Consumers
visiting a Company-owned caseta or public telephone may dial directly to the
desired party in exchange for cash payment, or can charge the call to a U.S.
address (collect, person-
8
<PAGE>
to-person, etc.) or calling card, or to a U.S. dollar-denominated credit card
with the assistance of an operator. In July 1998, the Company began providing
domestic U.S. and international call services to Mexico to residential customers
in the U.S., and intends to provide services to business customers in the U.S.
in fiscal 1999. Callers may either pre-subscribe to the Company's one-plus
residential service, or dial around their pre-subscribed carrier by dialing 10-
10-624, plus the area code and desired number. Where possible, these retail
calls are transported over the Company's own network infrastructure.
Utilizing the same framework described above, the Company also serves as a
retail and wholesale facilities-based provider of network services for corporate
clients and U.S. and Latin American telecommunications carriers. These
customers typically lack transmission facilities into certain markets, or
require additional capacity into certain markets. The Company currently provides
these services to and from the United States, Mexico, Costa Rica, El Salvador
and Guatemala.
The Company's consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has incurred
losses since inception and has a working capital deficit as of January 31, 1999.
For the reasons stated in Liquidity and Capital Resources and subject to the
risks referred to in Liquidity and Capital, the Company expects improved results
of operations and liquidity in the last six months of fiscal 1999.
RESULTS OF OPERATIONS
The following table sets forth certain items included in the Company's
results of operations in dollar amounts and as a percentage of total revenues
for the three and six-month periods ended January 31, 1998 and 1999.
<TABLE>
<CAPTION>
Three Months Ended January 31, Six Months Ended January 31,
---------------------------------------- ----------------------------------------
1998 1999 1998 1999
------------------ -------------------- -------------------- ------------------
(unaudited)
$ % $ % $ % $ %
--------- -------- -------- -------- --------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Operating revenues
- ------------------
Call services $3,644 42% $ 1,719 21% $ 6,506 44% $ 3,272 18%
Direct dial services 1,570 18% 1,486 18% 3,141 21% 2,826 15%
Network management services 3,174 36% 4,299 53% 4,527 31% 11,087 60%
Internet E-commerce 316 4% 621 8% 561 4% 1,176 7%
------ ---- -------- ---- -------- ---- -------- ----
Total operating revenues 8,704 100% 8,125 100% 14,735 100% 18,361 100%
------ ---- -------- ---- -------- ---- -------- ----
Cost of services 5,027 58% 4,824 59% 8,903 60% 11,325 62%
------ ---- -------- ---- -------- ---- -------- ----
Gross Margin 3,677 42% 3,301 41% 5,832 40% 7,036 38%
Selling, general and
administrative expense 3,293 38% 3,240 40% 6,085 41% 6,573 36%
Depreciation and amortization 541 6% 758 9% 880 6% 1,407 7%
------ ---- -------- ---- -------- ---- -------- ----
Operating loss (157) (2%) (697) (8%) (1,133) (7%) (944) (5%)
Other, net (358) (4%) (392) (5%) (680) (5%) (787) (4%)
------ ---- -------- ---- -------- ---- -------- ----
Net loss ($515) (6%) ($1,089) (13%) ($1,813) (12%) ($1,731) (9%)
====== ==== ======== ==== ======== ==== ======== ====
</TABLE>
9
<PAGE>
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1998
Operating revenues. Operating revenues decreased approximately $579,000, or
7%, due to declines in the Company's call services and direct dial services.
This decline was offset to some extent by growth in the Company's network
management and Internet e-commerce services.
Call service revenues decreased approximately $1.9 million, or 53%, due to
the Company's decision to cease providing domestic and international operator-
assisted calls originating in the United States and Jamaica in late July 1998
and lower volumes of operator-assisted calls originating in Mexico and
terminating in the U.S. Both of the above factors, were a direct result of the
Company's emphasis on providing call services from its own pay telephones and
casetas in Mexico. Historically, the Company provided call services to third-
party owned or controlled pay telephones and hotels in the United States,
Jamaica and the Dominican Republic. During the quarter ended January 31, 1998,
these calls generated approximately $788,000 in revenues. During the quarter
ended January 31, 1999, the Company processed approximately 42,000 operator-
assisted calls originating in Mexico and terminating in the U.S. as compared to
approximately 81,000 calls processed in the quarter ending January 31, 1998.
This decline resulted from the Company carrying less agent traffic during the
quarter than it had in the previous period. Similar to the call services
provided by third-party owned or controlled pay telephones and hotels in the
United States, Jamaica and the Dominican Republic, this traffic had relatively
low gross margins and high overhead costs.
Direct dial services, calls processed in exchange for cash without
utilizing the Company's operator center, decreased to $1.5 million from $1.6
million for the periods ended January 31, 1999 and January 31, 1998,
respectively. The calls are paid for almost exclusively in pesos, and the
resulting revenues are translated to U.S. dollars in the accompanying
consolidated financial statements. The average conversion rate of pesos to
dollars during the quarters ended January 31, 1998 and January 31, 1999, was 8.2
and 10.0 respectively. Although call volumes remained relatively even between
periods, the pesos generated converted to fewer U.S. dollars.
Network management services increased approximately $1.1 million, or 35%.
This growth was principally due to the additional minutes processed for other
carriers during the quarter ended January 31, 1999. The Company processed
approximately 12.0 million minutes of traffic for other carriers during the
quarter ended January 31, 1998, as compared to approximately 16.1 million
minutes during the quarter ended January 31, 1999. In April 1998, the Company
completed its Monterrey Hub facility, which significantly increased the
Company's ability to process additional carrier traffic.
The Company's Internet e-commerce services increased approximately
$305,000, or 97% between quarters. This growth was due primarily to the
increased number of downloads of the Company's CuteFTP product from January 1998
to January 1999. Monthly downloads grew from nearly 100,000 in January 1998 to
nearly 200,000 in January 1999. The increase in downloads has resulted in a
corresponding increase in the Company's revenues as approximately 3% of the
total downloads translate into actual sales of CuteFTP.
Cost of Services. Cost of services decreased approximately $200,000, or
4%, between quarters, but rose slightly as a percentage of total revenues from
58% to 59%. The decrease in cost of services was primarily attributable to the
decreased volume of business handled by the Company as discussed above. The
increase in cost of sales, as a percentage of revenues, was due primarily to the
increased network management services traffic, which has slightly lower gross
margins but significantly lower overhead costs, offset by the elimination of
operator-assisted calls provided in the United States and Jamaica. The
operator-assisted calls historically provided in the United States and Jamaica
did not fully utilize the Company's network and the Company incurred relatively
high commissions related to the traffic, as well as high overhead costs.
Selling, General and Administrative (SG&A). SG&A expenses declined 2%, or
approximately $53,000, between quarters. As a percentage of revenues, these
expenses increased from 38% to 40% between quarters. The increase in SG&A, as a
percentage of revenues, was primarily attributable to the decreased volume of
business processed by the Company during the quarter ended January 31, 1999.
Depreciation and Amortization. Depreciation and amortization rose
approximately $217,000, or 40%, between quarters and increased as a percentage
of revenues from 6% to 9%. This increase was caused by the addition
10
<PAGE>
of approximately $4.8 million in equipment between January 31, 1998 and January
31, 1999. The majority of the assets purchased consisted of equipment that added
capacity to the Company's international network infrastructure including the
Monterrey Hub installed in April 1998, the Network Equipment Technologies
(N.E.T.) equipment purchased in December 1998 and the Company's new Nortel DMS
250/300 International Gateway switch purchased in January 1999.
Operating Loss. The Company's operating loss declined $540,000 between
quarters and increased as a percentage of revenues from 2% to 8%, due to
decreased sales volumes, higher cost of services and SG&A as a percentage of
revenues, and increased depreciation and amortization.
Other Income (Expense). Other income (expense) increased approximately
($34,000). This increase was primarily attributable to an increase in interest
expense as a result of increased indebtedness and capital leases.
SIX MONTHS ENDED JANUARY 31, 1999 COMPARED TO SIX MONTHS ENDED JANUARY 31, 1998
Operating revenues. Operating revenues increased approximately $3.6
million, or 25%, due to growth in the Company's network management and Internet
e-commerce services. This growth was partially offset by declines in the
Company's call services and direct dial services.
Call service revenues decreased approximately $3.2 million, or 50%, due to
the Company's decision to cease providing domestic and international operator-
assisted calls originating in the United States and Jamaica in late July 1998
and lower volumes of operator-assisted calls originating in Mexico and
terminating in the U.S. Both of the above factors, were a direct result of the
Company's emphasis on providing call services from its own pay telephones and
casetas in Mexico. Historically, the Company provided call services to third-
party owned or controlled pay telephones and hotels in the United States,
Jamaica and the Dominican Republic. These calls generated approximately $1.8
million in revenues during the six months ended January 31, 1998. During the
six months ended January 31, 1999, the Company processed approximately 83,000
operator-assisted calls originating in Mexico and terminating in the U.S. as
compared to approximately 136,000 calls processed in the six months ending
January 31, 1998. This decline resulted from the Company carrying less agent
traffic during the current period than it had in the previous period. Similar
to the call services provided by third-party owned or controlled pay telephones
and hotels in the United States, Jamaica and the Dominican Republic, this
traffic had relatively low gross margins and high overhead costs.
Direct dial services, calls processed in exchange for cash without
utilizing the Company's operator center, decreased to $2.8 million from $3.1
million for the period ended January 31, 1999 and January 31, 1998,
respectively. The calls are paid for almost exclusively in pesos, and the
resulting revenues are translated to U.S. dollars in the accompanying
consolidated financial statements. The average conversion rate of pesos to
dollars during the six months ended January 31, 1998 and January 31, 1999, was
8.0 and 10.0 respectively. Although call volumes remained relatively even
between periods, the pesos generated converted to fewer U.S. dollars.
Network management services increased approximately $6.6 million, or 145%.
This growth was principally due to the amount of wholesale network services
provided to other carriers seeking transmission facilities or additional
capacity. The Company processed approximately 13.8 million minutes of traffic
for other carriers during the six months ended January 31, 1998, as compared to
approximately 43.0 million minutes during the period ended January 31, 1999. In
April 1998, the Company completed its Monterrey Hub facility, which
significantly increased the Company's ability to process additional carrier
traffic.
The Company's Internet E-commerce revenues increased approximately
$615,000, or 110% between periods. This growth was primarily due to the increase
in monthly downloads of CuteFTP from approximately 100,000 per month in January
1998 to approximately 200,000 per month in January 1999. The increase in
downloads has resulted in a corresponding increase in the Company's revenues as
approximately 3% of the total downloads translate into actual sales of CuteFTP.
Cost of Services. Cost of services increased approximately $2.4 million,
or 27%, between quarters, but rose slightly as a percentage of total revenues
from 60% to 62%. The increase in cost of services was attributable to the
increased volume of business handled by the Company as discussed above. The
increase in cost of sales, as a
11
<PAGE>
percentage of revenues, was due primarily to the increased network management
services traffic, which has slightly lower gross margins but significantly lower
overhead costs, offset by the elimination of operator-assisted calls provided in
the United States and Jamaica. The operator-assisted calls historically provided
in the United States and Jamaica did not fully utilize the Company's network and
the Company incurred relatively high commissions related to the traffic, as well
as high overhead costs.
Selling, General and Administrative (SG&A). SG&A expenses rose 8%, or
approximately $488,000, between periods. As a percentage of revenues, these
expenses decreased from 41% to 36%. The increase in SG&A was attributable to
the hiring of additional sales, marketing and technical personnel, between
periods, as well as increases in other personnel related expenses. In July 1998,
the Company implemented a company-wide cost reduction program designed to reduce
SG&A expenses as a percentage of revenues.
Depreciation and Amortization. Depreciation and amortization rose
approximately $527,000, or 60%, between periods, but remained relatively
unchanged as a percentage of revenues at 7%. This increase was caused by the
addition of approximately $4.8 million in equipment between January 31, 1998 and
January 31, 1999. The majority of the assets purchased consisted of equipment
that added capacity to the Company's international network infrastructure
including the Monterrey Hub installed in April 1998, the Network Equipment
Technologies (N.E.T.) equipment purchased in December 1998 and the Company's new
Nortel DMS 250/300 International Gateway switch purchased in January 1999.
Operating Loss. The Company's operating loss improved $189,000, or 17%,
between periods and improved as a percentage of revenues from 7% to 5%,
primarily due to increased sales volumes and improvements in the Company's SG&A
expenses as a percentage of revenues.
Other Income (Expense). Other income (expense) increased approximately
($107,000). This increase was primarily attributable to an increase in interest
expense as a result of increased indebtedness and capital leases.
LIQUIDITY AND CAPITAL RESOURCES
During the six month period ended January 31, 1999, the Company generated
cash flows from operations of approximately $200,000. This compares with the
$674,000 in cash flows from operations produced during the same time frame a
year earlier. The positive cash flows from operations for the six months ended
January 31, 1999 were the result of increased revenues and a reduction in SG&A
expenses as a percentage of revenues. Earnings before interest, taxes,
depreciation and amortization (EBITDA) improved from a negative $253,000 during
the six month period ending January 31, 1998 to $463,000 during the six month
period ending January 31, 1999.
The Company purchased approximately $640,000 in equipment during the six-
month period ended January 31, 1999. This equipment was paid for in part from
cash flows generated internally by the Company, and in part from the
approximately $558,000 in cash proceeds generated by the exercise of options and
warrants during the period. The Company also made approximately $977,000 in net
payments on borrowings and capital lease arrangements outstanding during the
period.
On January 16, 1999, the Company's wholly-owned subsidiary, GlobalSCAPE,
Inc. (GlobalSCAPE), purchased the rights to CuteFTP, a file transfer protocol
software that it sells and distributes. Terms of the purchase called for a cash
payment of approximately $171,000 to be made by January 31, 1999, and for
monthly payments of $63,000 for a twelve-month period starting in February 1999.
In order to make the cash payment due in January, GlobalSCAPE borrowed $180,000
from a bank, at an interest rate of prime plus 1%, to be paid back over a
twenty-four month period with principal payments of $5,000 a month for the first
twelve months and $10,000 a month for the second twelve months.
During December 1998, the Company ordered a DMS 250/300 international
gateway switch from Northern Telecom, Inc. at a cost of approximately $1.9
million. ATSI has received a proposal to finance the purchase of this switch
over a five-year period. This proposal does not represent a commitment, and is
subject to, among other things, satisfactory completion of due diligence
procedures. In accordance with current accounting literature the Company has
recorded the switch as an addition to property and equipment and an increase in
notes payable in the accompanying
12
<PAGE>
financial statements as of January 31, 1999. Additionally, the Company has
accounted for this transaction as a non-cash transaction. The Company also
committed to purchase approximately $500,000 in equipment from Network Equipment
Technologies, Inc. (NET) during the period which will be used to transform the
Company's current network to a packet-switching environment. In conjunction with
this purchase, and expected future purchases, NET has underwritten approximately
$900,000 in available lease financing. As of January 31, 1999, the Company had
not accepted the equipment, and no obligation has been recorded in the
accompanying financial statements.
The net result of the above-described operating, investing and financing
activities during the six month period was a working capital deficit of
approximately $7.6 million and cash on hand of $240,000 as of January 31, 1999.
Although the Company was able to generate positive cash flows from
operations for the six-month period ended January 31, 1999; the amount was not
sufficient to cover capital expenditures and debt service requirements during
the period. As a result, cash on hand decreased during the period. Although no
assurances can be given, the Company believes that it will be able to generate
monthly cash flows from operations by July 1999 sufficient to meet existing debt
service and working capital requirements. The Company believes that the recent
installation of the international gateway switch in Dallas and the upgrade of
the Company's network to include the latest in packet switching technology
provides a foundation for efficient, rapid revenue growth.
The Company anticipates near-term revenue growth to be derived from
increased traffic from U.S. carriers seeking termination services into Mexico.
The Company's current licenses allow the Company to transport such traffic into
Mexico and to deliver that traffic to concessioned carriers within Mexico for
final termination. The Company currently transports this traffic over its own
satellite-based network between San Antonio and Mexico City and Monterrey,
Mexico on a fixed cost basis, and contracts with various carriers in Mexico to
terminate the traffic on a per-minute basis. Although the Company believes that
wholesale prices for such traffic will continue to decrease due to competitive
pressures, it believes that its current cost structure will allow it to achieve
margins which, when combined with margins from call services and direct dial
services, will be sufficient to produce positive cash flows in excess of its
debt service requirements. However, no assurance can be given that this will be
the case.
In an effort to maintain and/or increase overall margins, the Company has
applied for a 50-year long distance concession from the Mexican government. The
Company believes that his concession, if received, will allow the Company to
transport its own traffic within Mexico and to interconnect with the local
access provider in Mexico, thereby minimizing the need to utilize other carriers
within Mexico and decreasing costs associated with transporting traffic within
Mexico. Although the Company anticipates that this concession will be received
in the current calendar year, no assurances may be given as to when, if at all,
it will be received, or that the Company will be able to reduce its costs if it
receives the concession.
Subsequent to July 1999, the Company expects to invest funds, if available,
into the marketing of retail products targeting Latinos in the United States who
frequently place calls to Mexico and other Latin American countries serviced by
the Company. By doing so, the Company believes that it will maximize margins on
calls that it transports from the United States to Latin America. The Company
also believes that it is important to generate brand loyalty with consumers in
the United States in an effort to gain a sustainable, subscribed customer base.
No assurances may be given, however, that the Company will have the funds
available to market such products.
In an effort to alleviate its working capital deficit, the Company is
seeking to raise from $1.0 to $5.0 million through the private placement of
convertible preferred stock, and is also seeking to secure up to a $5.0 million
senior debt facility.
13
<PAGE>
In an effort to raise funds and increase overall shareholder value, the
Company is also considering several alternatives relating to the possible spin-
off of GlobalSCAPE. Although no assurances may be given that any course of
action will actually occur, strategic alternatives include, among other things,
the potential distribution of GlobalSCAPE shares to ATSI stockholders and/or a
public or private offering of GlobalSCAPE shares.
INFLATION/FOREIGN CURRENCY
Inflation has not had a significant impact on the Company's operations.
With the exception of direct dial services from the Company's casetas and coin
operated public telephones, almost all of the Company's contracts to date have
been denominated in, and have called for payment in, U.S. dollars. Some
expenses directly related to certain contracts have been denominated in foreign
currencies, primarily Mexican pesos. Such expenses consist primarily of costs
incurred in transmitting long distance calls from Mexico to the Company's
switching facilities in San Antonio, Texas, and payroll and other administrative
costs associated with ATSI-Mexico and Computel. The devaluation of the Mexican
peso over the past two years has not had a material adverse effect on the
Company's financial condition or operating results. In fact, the devaluation
has had certain positive effects such as favorable conversion rates in
connection with the payment of certain expenses and stimulated tourism, which is
a principal source of the Company's call services revenues. The Company
maintains balances in several bank accounts in Mexico, which are denominated in
Mexican pesos, however, such balances are kept at minimum levels.
SEASONALITY
The Company's call services revenues are typically higher on a per phone
basis during January through July, the peak tourism months in Mexico.
PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
The exhibits listed below are filed as part of this report.
EXHIBIT
NUMBER
- ------
11 Computation of Earnings per Share (filed herewith)
27 Financial Data Schedule (filed herewith)
(b) Current Reports on Form 8-K.
None.
14
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
AMERICAN TELESOURCE INTERNATIONAL INC.
(Registrant)
Date: March 17, 1999 By: /s/ H. Douglas Saathoff
---------------------------
Name: H. Douglas Saathoff
Title: Chief Financial Officer
15
<PAGE>
AMERICAN TELESOURCE INTERNATIONAL, INC. AND SUBSIDIARIES EXHIBIT 11
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
For the three months ended For the six months ended
-------------------------------------- -------------------------------------
January 31, 1998 January 31, 1999 January 31, 1998 January 31, 1999
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
COMPUTATION OF NET LOSS PER SHARE
Net loss ($515) ($1,089) ($1,813) ($1,731)
======= ======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 38,446 46,324 37,757 45,976
======= ======== ======== ========
BASIC LOSS PER COMMON SHARE ($0.01) ($0.02) ($0.05) ($0.04)
======= ======== ======== ========
COMPUTATION OF DILUTED LOSS PER SHARE
Net loss ($515) ($1,089) ($1,813) ($1,731)
Interest not incurred upon assumed conversion
of convertible note 3 - 6 -
------- -------- -------- --------
Net loss applicable to common stockholders
used for computation ($512) ($1,089) ($1,807) ($1,731)
======= ======== ======== ========
Weighted average number of shares of common
stock outstanding 38,446 46,324 37,757 45,976
Weighted average incremental shares outstanding
upon assumed conversion of options and warrants 14,693 3,549 14,855 2,801
Weighted average incremental shares outstanding
upon assumed conversion of convertible note 191 - 196 -
------- -------- -------- --------
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS USED FOR
COMPUTATION 53,330 49,873 52,808 48,777
======= ======== ======== ========
DILUTED LOSS PER COMMON SHARE AND COMMON
======= ======== ======== ========
SHARE EQUIVALENT ($0.01) ($0.02) ($0.03) ($0.04)
======= ======== ======== ========
</TABLE>
(a) This calculation is submitted in accordance with Item 601 (b) (11) of
Regulation S-K although it is not required by SFAS No. 128 because it is
antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> JUL-31-1999 JUL-31-1999
<PERIOD-START> NOV-01-1998 AUG-01-1998
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 0 240
<SECURITIES> 0 0
<RECEIVABLES> 0 3,982
<ALLOWANCES> 0 315
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 4,802
<PP&E> 0 16,203
<DEPRECIATION> 0 3,208
<TOTAL-ASSETS> 0 25,055
<CURRENT-LIABILITIES> 0 12,852
<BONDS> 0 0
0 0
0 0
<COMMON> 0 47
<OTHER-SE> 0 6,172
<TOTAL-LIABILITY-AND-EQUITY> 0 25,055
<SALES> 8,125 18,361
<TOTAL-REVENUES> 8,125 18,361
<CGS> 4,824 11,325
<TOTAL-COSTS> 8,822 18,305
<OTHER-EXPENSES> (25) (56)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 365 780
<INCOME-PRETAX> (1,037) (1,668)
<INCOME-TAX> 52 63
<INCOME-CONTINUING> (1,089) (1,731)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,089) (1,731)
<EPS-PRIMARY> (0.02) (0.04)
<EPS-DILUTED> (0.02) (0.04)
</TABLE>
